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Government rumbles, Chinese virtual money markets stable for now

A couple of weeks ago it was reported (via PlayNoEvil) that China aims to restrict the trading of virtual currencies that have become popular as a payment method even for third-party services. According to the joint announcement of 14 Chinese government agencies including the Ministry of Public Security and People’s Bank of China, virtual currencies should not be used to buy real commodities and can only be traded back to real money for amounts not exceeding the original purchase price, eliminating any opportunity for profits.

This is the most severe notice so far in a series of growing government attention to the use of virtual currencies and real-money trade of virtual property in China. At the time of writing, however, RMT markets seem to be operating as usual. For example, Taobao lists thousands of sell offers for Q Coins, the virtual currency of Tencent QQ. I dug a little bit into Chinese language sources to find out more about what’s going on.

The government announcement does not contain any new laws or regulations, but rather a notice that existing regulations will be enforced. It sounds serious: People’s Bank of China will from now on enforce governance over virtual currencies in online games. There will be strict limits on the volumes of virtual currencies issued by operators and the amounts purchased by consumers. Virtual item trading should be clearly distinguished from e-business transactions, and virtual currencies should not be used to buy real commodities, only virtual goods and services provided by game operators who issue the currencies. The redemption of virtual currencies for value exceeding their original purchase prices will be banned to prevent attempts to realise profits. According to the notice, violators will be subject to prosecution for financial crimes detailed in China’s banking law.

The Chinese government is definitely taking RMT seriously. But how has the market been affected since this notice was published two weeks ago? So far, no secondary markets have been shut down because of the notice. Some third party auction operators said that so far, they have not received any detailed requests from the related government bodies, so the content and functioning of their websites has not been changed. No transactions of virtual currencies have been taken down.

In the online forums and BBSs of the trading sites this notice became a hot topic. Many people expressed their views and wishes on the matter (my translations):

“It could be pretty hard for the government to control this. The notice banned the activity of exchanging virtual currency for profit, and the redemption value of virtual currencies should not exceed original purchasing prices. But what is the definition of profit here? How can the government track the original purchasing prices? This notice is too equivocal,” wrote one commentator.

Some saw the move as negative thing for the development of virtual economy: “For an emerging, developing game industry, this notice would definitely be a heavy shock. It is not wise to directly ban these transactions without understanding their real effects on the economy; we could take advantage of virtual currency, make it more healthy and transparent. Intelligent guidance and regulation could be much better than just forbidding”.

Other comments included the following:“It’s a signal from the government but not the law.”
“It could end up being just like some earlier notices from the government that are soon forgotten.”
“Where is demand, there is a market. The government has a policy, the people have their own ways.”
“This notice is just a shot at Q coin,” referring to the dominant virtual currency.

“I will probably lose my job!” wrote a gold farmer.

I am guessing this notice could be regarded as a test to see how people would react to regulation, and also as a way to cool things down to win some time to examine the effects of virtual currencies on the financial system before the phenomenon becomes too large to control. According to some observers, the market for virtual currencies is growing by 20% per year. There are at least 10 virtual currencies, including Q coins, Baidu coins and gold coins from MMORPGs like WoW. Together they amount to billions of Yuan in value. I suspect the government will find it necessary to try to restrict the liquidity of the virtual currency markets further in the near future.

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The government’s latest announcement regarding the use of virtual currencies, was not a new law or regulation. However, the statement clearly shows which way the wind is blowing, and is an indication to virtual currency issuers in China to what the government’s position on the subject is.

Regarding the sale of Q Coins on Taobao: From a look at the listings on the site (over 10,000 last time I looked) it appears that the vast majority of the listings are in fact Q Coin top-up cards (or top-up card numbers and passwords) sold at a discount by top-up card vendors or by other QQ users who have extra top-up card credits on their card that they choose not to use themselves.

There is no secondary trade going on in Q Coins in the open market. The currency itself is not transferable through QQ’s platform and definitely not cashable by QQ.

Regarding other currencies such as Baidu Coins, POPO Gold Coins, and U Coins, for these even the trading volume in top-up cards is insignificant.

From my findings, I believe all real money trade in virtual currencies in China is in gaming currencies – mainly WoW gold. My colleagues and I conducted a study on this topic just recently.
Feel free to take a look: http://www.maverickchina.com/virtualcurrencies.html

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